Attorney with Osenton Law Offices Comments on Tax Implications of Bankruptcy

Individuals faced with overwhelming debt often consider filing for bankruptcy. The debts discharged in bankruptcy can include taxes, but Brandon, Florida bankruptcy attorney O. Reginald Osenton warns that rules and limitations apply.

“The good news is that some taxes can be discharged in bankruptcy proceedings,” said Osenton. “However, it is important to be aware of the limits that apply.”

First, Osenton notes, people considering filing for individual bankruptcy should know that if they are going through a tax audit, the bankruptcy will not stop the audit. Collection action will not take place while the bankruptcy is pending, as long as the IRS does not file a Relief of Stay motion. However, the statute of limitations is extended for the entire time of the bankruptcy proceedings, plus 30 days administrative time. The statute of limitations is extended any time collection action is stopped.

“Bankruptcy does not make a tax audit go away,” said Osenton.

Osenton noted that while some taxes can be discharged in bankruptcy, exceptions do apply. Any debts considered to be priority debt cannot be discharged. This includes child support, student loans and fines stemming from a crime. It also includes priority tax debts -- such as any fraud assessments, trust fund penalties and the trust fund part of payroll tax debts. All of these priority debts must be repaid, even in bankruptcy.

“In a Chapter 13 reorganization, priority debts must be completely repaid,” said Osenton.

Finally, according to Osenton, only tax debts that are three years old or more, based on the due date of the tax return, can be discharged during bankruptcy. In addition, the tax must have been assessed for 240 days or more, so if a tax return that was due three years ago is filed now, an additional 240 days must pass before the debt can be discharged. Also, the tax return must have been prepared by the filer; it cannot be a substitute return prepared by the IRS. And if a tax return has not been filed, then it is irrelevant how old the debt is: it cannot be discharged.

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